Embattled airlines strive to survive worst slump ever

Perhaps the sector of aviation most visibly affected by the events of September 11, the airline industry continues its struggle toward recovery, as security burdens, economic jitters and lingering public apprehension over flying conspire to sustain the worst slump in the history of the business. Although by June overall revenue passenger miles managed to creep back to within 8 percent of the levels registered a year earlier, unrelenting downward yield pressure has forced US Airways into bankruptcy and the rest of the nation’s largest airlines into a reassessment of their most fundamental business models.

As major airlines shed capacity in line with falling demand, the world’s regional airlines became the primary beneficiaries, assuming control of many routes no longer served by their mainline partners. Of course, the smaller airplanes used by regional airlines can profitably fly in markets rendered too small for major airlines by September 11. But the phenomenon also reflects a recognition of the smaller airlines’ fiscal discipline, something few major airlines could preserve during the industry’s money-making period between 1996 and 2000, when break-even load factors rose by 5 percent due to skyrocketing labor and infrastructure costs.

Today, airlines find themselves in the midst of an industrywide cost-cutting campaign, not only to mitigate record losses, but to convince investors and the government of their commitment to fiscal discipline. The problem remains, however, that such post-September 11 considerations as the so-called “hassle factor” related to new airport security procedures discourage people from flying, particularly on short routes where driving is an option. Meanwhile, new equipment requirements such as bulletproof cockpit doors, increased security training burdens for airline personnel and skyrocketing insurance premiums build barriers against the cost reductions needed to effect tangible progress toward recovery.

In a twist of irony, airlines have turned for help to the same government bureaucrats they’ve long criticized for unnecessary and heavy-handed regulatory actions. Unwilling and largely unable to carry the burden of airport security, the airlines enjoined a crusade to “federalize” the screening process, giving rise to the now familiar Transportation Security Administration. By mid-July the TSA’s first under secretary, John Magaw, abruptly resigned his post amid complaints from airlines and legislators about his alleged tendency to turn a “tin ear” to their concerns over security initiative deadlines.

Now led by Magaw’s former deputy, James Loy, the TSA has come under increasing scrutiny as looming deadlines for security improvements creep ever closer, while legislators and DOT officials remain at odds over issues such as guns in the cockpit and the level of funding needed to meet the government’s airport security goals. By the end of July the TSA had finished deploying government screeners at just 10 of the 429 airports designated for a transition from private security forces by November 19. At the same time the agency cited security considerations for its refusal to publicly report on its progress toward installing 1,100 explosive detection machines mandated as part of a plan to screen all checked luggage by December 31.

In July Congress shaved $650 million from the $4.4 billion originally proposed to fund the TSA, raising the ire of DOT Secretary Norman Mineta, among others, who insist the remaining $3.85 billion will not support the mandates and timetables set by Congress last fall. Along with the reduction in funding, Congress capped the number of TSA employees at 45,000, compared with the 67,000 the TSA estimated would be needed to perform the task at hand.

Mitigating the “hassle factor” stands as one of the airlines’ most pressing concerns, particularly for regional carriers who have long sold speed and efficiency as their most valuable commodities. Studies show that passengers have increasingly chosen to drive rather than fly on regional airplanes because of the extra time it now takes to get through airport security, potentially rendering many short-haul turboprop markets obsolete.

“It’s like trying to change a tire while you’re driving 60 miles an hour,” said Regional Airline Association president Debby McElroy. “We have to continue to run the system as efficiently as possible and increase passenger confidence at the same time we’re making these monumental changes. They’ve got a Herculean task ahead of them. At the same time, regionals have unique operations and perspectives; we are hugely affected by the time equation. Business travelers use us because we increase their productivity. Obviously the security measures are diminishing that.”

Despite the RAA’s concerns, as a whole regional airlines in both the U.S. and Europe have escaped the devastating losses experienced by their major partners. In fact, the U.S. regional segment during this year’s first quarter posted total RPM gains of 18.9 percent over the same period a year earlier, and its largest increase in enplanements since the fourth quarter of 2000. Although downward yield pressure and code-share rate concessions have tempered the outlook somewhat, regional airlines appear well on their way to weathering the post-September 11 storm. Only time will tell how many of their major airline counterparts can follow suit.